This is fantastic guest post by Omie Ismall who shares his experience as successful entrepreneur. Looking to create your own start-up company from scratch? If so, read this and take notes.
Some years ago, I sat down with one of my Board members to discuss my next year’s compensation. He said something that still sticks with me to this day,
“You know, your salary doesn’t matter because you’ll never build real wealth from it”
I dismissed the thought. After all, I had built a six-figure portfolio by the time I was thirty and carried no debt. My wife and I had lived cheaply since college and had saved 25% of our dual incomes. But my advisor, who was worth tens of millions of dollars, knew firsthand that the truly rich almost all do it via equity not salary.
Sure, anyone that makes a reasonable salary can build up a million dollar portfolio by simply living below their means and investing the excess cash. That’s much of what we preach at LiveCheap. It takes a long time with great expense control, but it is the safest way to becoming relatively well-off at minimal risk.
But the amount of wealth that can be built up with an equity position can make your best efforts saving salary look like a pittance. It’s not the only way, as I wrote in 5 Ways to Get Rich in Less Than 15 Years, but for those that want to build something and make a fortune, small companies can be a goldmine.
I’m not talking about the Bill Gates’ or the Michael Dell’s of the world. That’s not your average entrepreneur. Most small company business owners make their money by dramatically increasing their net worth on the path from $1 million in revenues to $10 million.
At $1 million, the company is nearly worthless but at $10 million it could be worth $20 million or more. In fact, once the $10 million mark is crossed, a whole host of potential buyers are quite eager to write you a big check. If you can spend 10 years of your life and grow a company past that mark, you will be wealthier than almost anyone of reasonable income. Sound easy? It’s not.
It took me 18 months to hit the $1MM mark from the day of our first sale, but it took nearly 5 more years to get beyond $5MM. And by most business standards, especially when you are creating an industry, that’s fast.
The small company is a massive wealth builder for a couple key reasons. Running a successful small company forces you to live below your means. Your net worth includes a concentrated position in something that you cannot access: private company stock.
Since you are always exposed to downside risk, you tend to be very hesitant about spending money, as you may need to invest capital into the company at any time. Also, being successful at a small business usually means watching expenses carefully, something that usually is done in one’s personal life too.
When you finally sell, it is treated as a long term capital gain subject to a maximum 15% federal capital gains tax. If it were income, it would be taxed at more than twice the rate. So when the day comes to sell, most entrepreneurs are able to undergo a radical change in lifestyle, although many stay true to their frugal ways.
This varies dramatically from doctors or lawyers who tend to scale their expenses as their incomes grow and don't fall victim to the common traits of the wealthy. An entrepreneur that has never pulled down more than a $150,000 salary may suddenly have a check for $10 million dollars.
So what’s the catch?
Well, few people want to work hard enough to make it happen. You make less than you would at a regular job and work far more hours, anywhere from 60 to 100 a week, for many years. The stress is enormous and you find out very quickly how hard it is to consistently meet payroll. You’ll expose your family to downside risk that you never had being a regular employee and you’ll put off the things that your family wants to do for years all in the name of the business.
Unlike a regular job, you just can’t hop to a new gig every few years: your employees depend on you and you’re tied to the business. There are dozens more drawbacks but for me they were all overshadowed, not by the ability to build wealth, but rather the ability to build something of lasting value. And that’s probably the reason why most entrepreneurs don’t want to sell their business even when they have multiples of what they need to retire. They love it and become inseparable from it.
Interested in building real wealth?
The following list is a quick gut check for being an entrepreneur and learning how to make a million:
- Are you willing to put your family at financial risk in order to grow a company?
- Are you willing to put in the late nights and weekends to make it happen?
- Do you have core skills that will let you become a great business owner?
- Do you know an industry well enough to run with an opportunity?
- Do you have a passion for something? – just wanting to make money usually isn’t enough
- Do you have enough capital to start the business or make an acquisition?
- Will your spouse or significant other support you in your endeavor?
The last point is vitally important. Entrepreneurs often have no idea how much they put their wives (or husbands) through. If you answered yes to these questions, then start heading down the path of entrepreneurship. In 10 to 15 years, you may have more than enough money to retire, even if you don’t want to.
Omie Ismail is the CEO of Live Smart Media Inc. the holding company for LiveCheap.com. Omie is a successful information and software CEO for the past decade having taken eCivis Inc. from concept to become the leading grants management company for governments nationwide. He has a passion for helping people live the good life cheaply and for growing businesses from the ground up. Omie currently splits his time between his family, LiveCheap, and his next venture.